A couple of months ago, Gold Fields Limited (ADR)(NYSE:GFI) announced a higher dividend after posting profit in 2016 on back of weaker emerging-market currencies and higher gold prices. The company posted a profit of $162.8 million for the year closed December compared to a loss of $242.1 million in the same period, a year ago. Its headline EPS, which excludes certain one-off and exceptional items, stood at 26 cents in 2016 compared to a headline loss of 4 cents per share in 2015.
Gold Fields reported that for 2016, revenue jumped 8% from the preceding year to $2.75 billion. Fluctuations in the market price for gold, and also of copper, which in the last few years have fluctuated considerably, impact the profitability of company’s businesses and the cash flows recorded by those operations.
Gold Fields’ revenues are mainly derived from the gold sale that it produces. The Group’s plan is to stay unhedged to the gold price, yet hedges are sometimes assumed to shield cash flows at times of major expenditure, for particular debt servicing needs and to safeguard the feasibility of higher cost operations. Therefore, it is exposed to fluctuations in the gold price, which can result in lower revenue should the price drop.
After declining 45% between late 2011 and December 2015, the gold price recouped its losses in FY2016, closing the year at $1,130 per ounce. As of April 3, 2017, it stood at $1,247 per ounce, amidst volatile trading due to global economic and political uncertainties.
The market price for yellow metal has historically been unpredictable and is affected by many elements over which Gold Fields possess no control, like general demand and supply, global economic drivers and speculative trading activity. If the gold price drop below company’s production costs, it may record losses. Moreover, if this situation prevails for a longer period, the company may have to suspend or curtail some of its operations and/or lower operational capital expenditures.